A Guide on Income Tax Notices and How to Avoid Them!

The Indian Income Tax Department sends notice to people to address differences, omissions or non-compliance in tax filings. In the past few years, many NRIs have received notice from the Income Tax Department of India.

Receiving such a notice can be stressful, especially if you live abroad and cannot visit the income tax office of India frequently. But understanding the meaning and causes can help you avoid receiving them and address them on time, if received. In this article, we are discussing 5 common types of tax notices and sharing practical strategies to follow Indian tax regulations.

1. Non-Filing of Income Tax Return

NRIs earning taxable income in India must file Income Tax Returns (ITRs) annually. If you have such earnings and missed filing your returns, the Income Tax Department issues a notice.

Income sources like property rental, capital gains and interest earnings are taxable unless explicitly exempted or covered under a DTAA (Double Taxation Avoidance Agreement). For example, an NRI earning a rental income of ₹6 lakh in India did not file a return. The income tax authority of India issued a notice demanding clarification.

How to Address This Notice:

1. Determine Taxable Income: Assess your Indian income, including deductions and exemptions, to confirm if you were liable to file your return.
2. Respond to the Notice:

• If liable to file, prepare and submit your ITR for the financial year applicable.
• If not liable, explain the reason for non-filing, along with supporting documents.

3. Pay Dues and Penalties: If you have unpaid tax, clear all the dues as soon as you can.

2. Mismatch in TDS and Form 26AS

TDS (Tax Deducted at Source) is recorded in Form 26AS, which keeps a record of taxes paid. A mismatch happens when TDS deducted by your employer, bank or tenant is different from the records filed by these entities.

For example, a bank deducts TDS on an NRI’s fixed deposit but fails to report the right figure to the tax department, causing a difference.

How to Address This Notice:

1. Check Records:

• Download Form 26AS from the Income Tax portal. Compare it with your TDS certificates and ITR filing.
• Check AIS (Annual Information Statement) for transactions.

2. File a Correction Request: If a mismatch is found, log in to the portal and use the correction (rectification) option to update or correct your ITR.
3. Avoid Future Errors: Share your updated PAN details with related parties like banks to ensure correct filing.

3. High-Value Transactions

The tax department monitors high-value financial transactions through the Annual Information Statement (AIS) and other reporting mechanisms, such as cash deposits above ₹10 lakh, property transactions above ₹30 lakh and ₹10 lakh+ investment in mutual funds. If these transactions are not reflected in your ITR, a notice may be issued.

For example, an NRI purchases a property for ₹50 lakh but fails to report the transaction in their ITR. In this case, such a transaction will be noticed by India’s income tax department.

How to Address This Notice:

1. Check AIS and Form 26AS: Verify the transactions that have been reported. The AIS provides detailed records of high-value transactions that have been reported to the tax department.
2. Modify Your Return: If the transaction was not declared, file a revised return.
3. Provide Documents: Respond with proper documents of such transactions.
4. Understand the Limits: Know the limits of such transactions to ensure proper reporting in the future.

4. Defective Returns

A defective return notice is issued for errors or omissions in your ITR, such as using the wrong form (e.g., ITR-1 for capital gains), missing compulsory details like foreign income / deductions and incorrectly calculating taxable income.

For example, an NRI needed to file ITR-1 but instead files ITR-2. This is going to attract a defective return notice.

How to Address This Notice:

1. Review the Defect: Log in to the Income Tax portal and access the “e-Proceedings” section to review the notice details.
2. Rectify Errors: Use the correction window provided by the tax department (typically 15 days) to amend your return. Ensure you select the correct ITR form and fill out all mandatory fields.
3. Re-File the Return: Submit the corrected return on the income tax website of India and verify it through Aadhaar OTP, net banking, or other methods.
4. Take Professional Advice: If unsure about the defect, consult an expert tax advisor like SBNRI to avoid repeated errors.

5. Non-Disclosure of Offshore Assets or Income

NRIs must declare foreign bank accounts, assets or income if it is taxable as per India’s income tax department. Non-disclosure can lead to penalties notices demanding detailed disclosures.

For example, an NRI holding a foreign mutual fund fails to report it in the ITR, triggering a notice.

How to Address This Notice:

1. Review Reporting Obligations: Confirm whether the foreign asset qualifies for disclosure under Indian tax laws or DTAA provisions.
2. Respond with Details: Submit a response detailing the asset or income, supported by bank statements, investment proofs, or account summaries.
3. Avoid Severe Penalties: Rectify omissions promptly to avoid hefty fines (up to ₹10 lakh per undisclosed account) or prosecution.
4. Future Compliance: Declare foreign income and assets in Schedule FA of the ITR, even if they aren’t taxable in India.

Proactive Measures to Avoid Notices

• Regularly reconcile your financial statements with Form 26AS and AIS.
• File your returns accurately and on time.
• Report all income sources, including foreign income and high-value transactions.
• Consult professionals for clarity on tax rules and compliance.

As an NRI, understanding and complying with Indian tax laws is crucial to maintaining smooth financial operations. While tax notices can seem troublesome at first, they are often a call to address discrepancies or omissions.

By staying informed, filing returns on time, and engaging professionals when necessary, you can avoid these challenges. Compliance not only ensures peace of mind but also aligns with your financial goals across borders. Stay diligent to navigate the complexities of Indian taxation with confidence and chat with NRI Tax Expert to resolve all your notices and queries under one roof.

SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.

Frequently Asked Questions

What should I do if I get a notice for not filing my ITR?
Check if your income exceeded the exemption limit. If so, file the return immediately and pay any dues with penalties. If not, respond explaining why filing wasn’t required or connect with an expert!

What happens if I don’t disclose foreign assets or income?
Non-disclosure can attract severe penalties, including fines up to ₹10 lakh per undisclosed account or asset, and legal prosecution under the Black Money Act.How can I stay compliant and avoid future tax notices?
File accurate returns on time, reconcile financial records with tax forms, report all income sources, and consult professionals for tax planning and compliance.